TELECOM RELIEF PACKAGE – All You Need to Know About the Much Awaited Package!

On 15 September 2021, the Union Cabinet approved the much awaited telecom package, aimed to provide structural reforms to relieve the cash-strapped telecom sector. The package would be a huge relief to Indian telcos, especially Vodafone Idea and Bharti Airtel, that have been struggling to pay their AGR dues.

In this post, you would find why the package was needed, what are the changes, cost to government, expected impact of the package and in the end we'll discuss whether this package is enough and the future outlook of the telecom sector.

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WHY WAS THE PACKAGE NEEDED?

Since 1999 i.e. post liberalisation, mobile telephone operators have been required to pay the government a percentage share of their Adjusted Gross Revenue (AGR) as annual license fee (LF) (8%) and spectrum usage charges (SUC) (3-5%), instead of a fixed steep license fee.

However, since 2005, there had been a dispute between the telcos and DoT (Department of Telecommunications), regarding the definition of AGR - whether to include revenue from non-telecom services in it or not.

On 24th October 2019, Supreme Court settled the 14-year long dispute by defining AGR to include revenues from both telecom and non-telecom services. As a result of this ruling Telecom Service Providers (TSPs) were then required to pay the government ₹1.52 lakh crore in back charges, interest and penalties on license fee and spectrum usage charges.

Obviously, this was a huge hit to the balance sheet and cashflow of the TSPs, who now had to pay up un-provisioned overdue amounts collected over the years. The largest burdens fell on Vodafone Idea (₹58,000 crore) and Bharti Airtel (₹43,000 crore). Reliance Jio, being a late entrant in the sector got dues of ₹191 crores only.

Okay, but can't these big companies just pay this amount off? No, it isn't that easy.

• Firstly, they didn't made any provisions for these while the dispute was ongoing. So, after the apex court verdict, it was a HUGE blow to their balance sheets.

• Secondly, since the entrance of Reliance Jio, the telecom sector has seen very low tariff rates, which have been creating liquidity troubles for these enterprises.

• Moreover, the Supreme Court gave them only 10 years to pay back the amount.

The AGR dues has created a lot of financial troubles for the telcos since then:

• Vodafone Idea (VI) has been having liquidity problems and might have gone bankrupt as its management was running out of ways to infuse new capital to meet the AGR dues.

• In July 2021, Former Chairmen of VI, Mr. Kumar Mangalam Birla offered to sell his stake to government or any other approved firm as per government for FREE;

• In August 2021, Bharti Airtel approved a ₹21,000 crore rights issue to fund the AGR dues.

Now you might be wondering that what could happen if VI goes bankrupt?

VI is India's 3rd largest TSP and if it goes bankrupt, it would result in a duopoly in the telecom sector that can be very harmful, especially for the consumers and the economy at large.

Thus, a relief in AGR dues would be very helpful for these telcos.

WHAT ARE THE PROVISIONS / CHANGES UNDER THE PACKAGE?

Following are the major provisions and changes made under the 2021 Telecom Package:

• 4-year moratorium on payment of statutory dues (i.e LF and SUC) from 1st October 2021 to Telecom Service Providers (TSPs), on a voluntary basis. Those who opt need to pay interest on the amount availed under the moratorium scheme.

• 100% FDI allowed through automatic route. Earlier only 49% was allowed through the automatic route*, and rest through the government route*.

*FDI under sectors is permitted either through the Automatic route or Government route. Under the Automatic Route, the company does not require any approval from the Government of India. Whereas, under the Government route, approval from the GoI is required prior to investment.

• Redefining AGR (Adjusted Gross Revenue) to exclude non-telecom revenue. This would reduce license fee burden for all telcos and make bundling of phones easier.

• Rationalisation of license fee and spectrum usage charges: Interest payable in case of delayed payment of statutory dues has been reduced and would be calculated as Marginal Cost of Funds based Lending Rate (MCLR) + 2%.

Moreover, interest would now be compounded annually instead of monthly. And, TSPs do not need to pay penalties or interest on penalties anymore, which constituted bulk of AGR dues.

• The Centre also has the option of converting operators’ dues owing to the deferred payment into equity at the end of the 4-year moratorium period, guidelines for which will be finalised by the ministry of finance.

• Simplification of rules for permission to set instal new towers: Department of Telecommunication would now accept data on a portal based on self-declaration made by the telcos.

Currently, TSPs need to take 25-26 permissions from various government authorities to set up new towers which takes around 3-6 months. The ease in the same would help in 5G proliferation as it would require to double up the towers and small cells in the country.

• Spectrum sharing would be made free, auction will take place in the last quarter of the financial year.

• Spectrum sharing more attractive as the additional 0.5% on SUC has now been removed.

• Telcom Companies would now be allowed to surrender unused spectrum.

COST TO GOVERNMENT

The package has been designed in such a way that it is net revenue neutral i.e. it has zero cost to the government. In order to do this, the interest payable on the moratorium amount has been set by taking the net present value (NPV) in consideration.

IMPACT

This package is no doubt a huge news for the cash-strapped Indian Telecom sector. Companies like Vodafone Idea, Bharti Airtel and Reliance Jio are the biggest beneficiaries of the said package.

It is likely that Vodafone Idea and Airtel would opt for the scheme while Reliance Jio would probably not as they are more willing to pay off the due amount on one go.

The package is especially helpful for India's 3rd largest telecom service provider, VI as the same was on the verge of bankruptcy.

This package would, to some extent, solve the cashflow problem of TSPs who have thousands of crore of rupees worth un-provisioned past statutory dues. Analysts estimate a cashflow relief of ₹24,000 crore per year due to the moratorium for VI and ₹12,000 for Bharti Airtel.

Apart from this, this relaxation would allow telcos to allocate more funds towards expansion of their market share, infrastructure and 4G & 5G technology proliferation.

After the announcement of the package, share price of VI and Bharti Airtel surged by 2.9% and 5.4% respectively.

Some more positive impacts are:

• Infusion of Liquidity for Telecom Companies

• Creation of employment opportunities

• Promotion of healthy competition and Avoiding Duopoly in the telecom sector

• Protection of consumers' interests

• Encouraging more investment

• Reduction of Regulatory Burden on TSPs

CONCLUSION

While this package was definitely required and useful, we must note that it still might not solve all the problems.

Firstly, in must be noted that the telcos still need to pay their due statutory amounts, however now they have more time to do so.

In the longer run, telcos would need to increase their tariffs to survive and be profitable. According to Mr. Sunil Mittal, Airtel's Chairman, 30-35% of their revenue to go pay taxes to the government.

Moreover, this is not an end to VI's troubles. VI's market share has fallen from 33% to 22% in the last 2 years and would continue to fall unless they are able to improve and expand their services quickly.

If VI's fails to do so, we can either see it becoming a government undertaking in the future or a possible duopoly in the telecom sector.

But still, despite these points, this package is the first step towards tackling the problems of our Telecom Sector.

What are your views about the package?

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